The corporate tax system should be radically overhauled in the wake of the row over how much Google should pay in the UK, former chancellor Lord Lawson said.

He told the Telegraph that corporation tax has “had its day” and should largely be replaced with a tax on sales to prevent large-scale avoidance by multinationals.

Google has agreed to pay £130 million in back taxes covering the last decade in a deal struck by HM Revenue and Customs hailed as a “victory” by Chancellor George Osborne.

Mr Osborne argues that it was previously paying nothing and points to the introduction last year of a diverted profits tax to target companies which artificially shift revenues from Britain to countries with lower tax rates.

Critics however claim the internet giant was effectively paying just 3% tax and have called for the arrangement to be investigated by the National Audit Office and the European Commission.

Lord Lawson, who was chancellor in Margaret Thatcher’s governments between 1983 and 1989, told the newspaper: “It is profoundly unsatisfactory that corporation tax has to be collected from large multinational corporations by a series of ad hoc compromise deals, as we have once again seen with the Google affair.

“It is also grossly unfair on smaller businesses, who are unable to shift profits between tax jurisdictions and have to pay the full amount due under UK law.

“I have long argued that in the modern world corporation tax has had its day as a major source of tax revenue. It needs to be a much lesser tax, bolstered by a tax on corporate sales.

“While multinationals can artificially shift profits to whatever tax jurisdictions they choose, sales are where they are, and can’t be shifted.

“Instead of endless discussion at international conferences of one kind or another, the UK should take the lead in implementing this much-needed reform.”